PEPSI

Supply Chain
Our products depend on a safe, high-quality and affordable supply of agricultural raw materials to meet the demands of our business and the expectations of our consumers, customers and other stakeholders. Increasing pressure on global food supplies combined with a growing focus on greenhouse gas management create a new set of challenges and opportunities for our business. These challenges and opportunities are not only connected to the crops we need to support our brands, but also to a complex, global supply chain that involves thousands of independent farmers, hundreds of intermediaries and a small number of company-owned farms.

This year's Supply Chain Innovation award winner started out to optimize cramped warehouses. It wound up transforming its entire process for building orders and getting them to retailers. Sometimes the way to build a better mousetrap is not by tinkering with the old one but by tossing out altogether and starting afresh. That's essentially what Pepsi Beverages Company, the winner of this year's Supply Chain Innovation award, did with its new direct-to-store delivery model. Pepsi Beverages Company is itself somewhat of a new enterprise. On February 26, 2010, PepsiCo completed its mergers with The Pepsi Bottling Group and PepsiAmericas. PepsiCo's new operating unit, Pepsi Beverages Company, serves the United States, Canada and Mexico. It goes without saying that PBC moves a tremendous amount of product every day. In doing so, executives came to the painful conclusion that with ever growing sales and SKUs, the walls of the company's warehouses and distribution centers figuratively were bursting at the seams. Enter the Warehouse Infrastructure Initiative, which for all practical purposes was an

attempt to re-engineer the old mousetrap; in this case, to make it bigger. When all was said and done, that effort was set aside in favor of the highly innovative - and successful - Direct-toStore Delivery Transformation Initiative. Here are the benefits, according to Timothy Thornton, PBC vice president, supply chain logistics: The distribution strategy that ultimately resulted delivers more than product. "Breakthrough warehouse cost savings" flow as well. In addition, the model has reduced inventory system-wide, eliminated warehouse space constraints and provides the key for unlimited SKU growth. Leveraging new case-picking order-fulfillment automation technology and combining its homegrown order management tools enabled PBC to "crack the code" on labor-intensive activities in direct store delivery, Thornton says. The initiative has transformed PBC's warehousing and distribution model by moving as much as 85 percent of the delivery vehicle load-building upstream from satellite warehouses and DCs back to centralized automated work centers. "This also

enables PBC to re-purpose and transform our current satellite warehouse and distribution facilities to 'Top Off' and cross-dock locations," he says. More specifically, the benefits mean this: direct labor costs in the warehouse are down 40 percent, network inventory has been cut by a third, manual picking productivity is up 18 percent, transport trailer loading productivity has increased by up to 58 percent, and delivery productivity is up by 15 percent with more than a 25-percent internal rate of return. The backdrop to Pepsi's award-winning innovation is this. In 2002 the company decided to expand manufacturing capabilities to enable growth. It needed to transform its warehouse effectiveness and a so-called "go-to-market" strategy to optimize service and costs. At the same time it was faced with a rapidly shifting product line and customer expectations. Thornton says his Supply Chain Logistics Group was tasked with "transforming warehouse effectiveness." With that, the Warehouse Infrastructure Initiative was born.

Among the hurdles the team faced: Daily sales orders needed to be picked and loaded within an 8- to 12-hour window, order profiles and SKU proliferation continued to challenge productivity efforts, building pallets was highly complex, and employee turnover was too high for a number of reasons, not least of which was because morale was low. Moreover, more than 65 percent of the remote satellite warehouses in the company's network were at or above their designed space / inventory index. Some were totally landlocked; increasing their footprint was not an option under any circumstances. In any event, past efforts to enlarge such facilities had seldom yielded satisfactory rates of return, and internal company competition for investment capital was stiff. The team was able to invest in automation equipment, however, though the systems available in 2002 were not quite up to the task of meeting Pepsi's complex needs in picking and handling of pallets, layers and cases. A great deal of trial and error followed in its

pursuit of the right automation, and then the team had an epiphany that changed its focus to a combined approach to automation and distribution. "We had to look beyond the warehouse," Thornton says. "The myth was that the warehouse and delivery were not linked." They were, of course, and so the Warehouse Infrastructure Initiative became the Direct Store Delivery Transformation Initiative. The team knew it needed a way to more tightly control orders, inventories and movements within the distribution network. They figured that required a location solution that could address storage, control and automation. As it happens, typical PBC distribution zones consist of a large manufacturing plant / distribution warehouse that sends product to five to eight satellite warehouses facilities within a driving distance of 165 miles. Eighteen such zones were assessed before PBC chose the one in Tampa, Fla., with its six satellite warehouses, to prove out the new concept. It was while re-purposing the traditional satellite

warehouses, that the Pepsi team had still another brainstorm and developed its "Top Off" concept, the crux of its innovation. "Top Off" is an order pallet building process that enables up to 85 percent of the cases to be built at the upstream automation facility, then transported to the satellite warehouse where the remaining 15 percent of the cases are placed on top of the pallet. The pallet is now complete and ready for loading onto the delivery vehicle. In the Tampa facility, the automated storage and retrieval system is 100 feet high, holds more than 12,000 pallets and almost 1 million cases. It requires one fourth the footprint of a conventional warehouse with a comparable cost per pallet position investment. Fully automated with no dedicated operators, it became operational in January 2009. Software packages integrated with the AS/RS solution include a Westfalia Technologies WCS, Dematic Voice Pick, and RedPrairie WMS. They started operating from January 2009. PBC's proprietary operations management system (OMS) went live in October 2009.

Automated layer and case-picking systems from Kuka Systems, Kuka Robotics, Westfalia, Lightning Pick and others form the equipment foundation for the facility. The company describes the OMS as an eventdriven system that processes real-time orders generated from PBC's various sales systems. It determines the ideal order configuration for proper load building and handling to optimize network order fulfillment capacity, while leveraging order fulfillment capability. That extends the picking and loading window to more than 20 hours instead of the previous 8to 12-hour window. Drivers and merchandisers are major beneficiaries of what PBC calls the Mixed Layer Pick Automation capabilities of the OMS. The new system loads cases on trucks in reverse stop sequence. That allows drivers to more efficiently deliver products to a store by reducing the number of day doors opened at each stop and "dramatically" reducing the number of cases re-handled throughout the day. It also saves many a driver's back, minimizing injuries and worker's compensation claims, Thornton says. For retailers, the win is in the build of pallets that

eliminates backroom chaos, out-of-stocks and other inventory problems. The direct-to-store model also greatly enables pre-built "display" pallets, customized floor-ready pallets of the desired combination of SKUs. "This is not a point solution," Thornton says. "This is a network solution." With that in mind, he says, the company plans to roll the concept out to 17 other distribution zones in the U.S. and Canada in the coming years. Resource Links:

Westfalia Technologies, www.westfaliausa.com Dematic, www.dematic.com RedPrairie, www.redprairie.com Kuka Systems, www.Kuka-Systems.com Kuka Robotics, www.Kuka-Robotics.com Lightning Pick, www.lightningpick.com